IFRS 17 implementations step by step process

IFRS 17 is a standard which helps to get the insurance company on a consistent and comparable standard to compare the profitability and financial situation of the company across the industries. With the regulator's deadline approaching worldwide, it has become important for the insurance to implement IFRS 17 as soon as possible to meet the deadlines.

It takes 8 to 10 months to implement one IFRS 17 model for one approach. IFRS 17 has 3 approaches for contract.

?General measurements method (GMM): This is the default approach for most insurance contracts where the duration of the coverage period is more than a year and there is no investment component in the insurance contracts. Insurance contracts within GMM are categorized further into less risky (non-onerous), risky and defaulted (onerous) contracts similar to IFRS 9, they come in different groups and are treated separately.

Primary allocation approach (PAA): This approach is suitable for the contract which has a coverage period of less than a year. Any contract which has no effect on its cash flows if treated under PAA, can also be treated under PAA.

Variable fee approach (VFA): all the insurance contracts which have an investment component, are treated under VFA.

When we analyzed the different approaches and compared, PAA approach had a simple calculation like IFRS 4. The components contribution services margin (CSM) does not exist in PAA calculation. The difference between GMM and VFA approach is CSM and rest of the cash flows are similar in nature of calculation. This difference in CSM comes between both approaches because at each target date, insurance companies are bound to pay a percentage of its earnings on the investment component of the insurance contract.

The process of IFRS 17 implementations involves 4 different roles- actuary, accountant, business analyst and project manager.

Actuary:?The role of the actuary is to take inputs from an accountant such as discount rate, risk adjustments applied, data organized in the cohort and approach identified. The actuary discusses these parameters within the organization before using the numbers as they are. Actuary works with one of IFRS 17 software available in the market, it can come from any vendor including SAS, Oracle or Moody's analytics. He inputs the different inputs including data organized into cohort, discount rate and other parameters. The IFRS 17 model is built as different inputs are fed to IFRS 17 software.

Accountant: The primary role of an accountant is to agree within organizations on different numbers such as cohort formation, discount rate, and risk adjustment values.?An accountant’s role is also crucial in getting the different contract's data with the help of data warehouse experts and verifying the accuracy and consistency of the data. The accountant is also responsible for building the excel based IFRS 17 model in parallel to the actuary building the model using IFRS 17 software. Throughout the process, Actuary and accountant should have the same cash flows number, same discount rate, risk adjustment and CSM in the intermediate results. At the end of the process, both actuary and accountant should have the same model results with financial statements matching from both the excel and IFRS 17 software process.

Business analyst: The role of the business analyst is to document each step of the process:

How different input numbers are obtained??

How is the discount rate calculated?

How are risk adjustments calculated?

How is data pulled from the system for different contracts?

How is the modelling approach decided for each contract?

How different cohorts are formed for each modelling approach?

How do the different calculations steps happen in an accountant's model development in Excel ?

A business analyst should also be an excel expert so he can assist the accountant with model development in Excel.

Project manager: The primary objective of the project manager is to coordinate between different activities of actuary, accountant and business analyst and do time management of the project.

IFRS 17 implementation process: The process starts with a data warehouse expert pulling the data on the advice of the accountant who has the knowledge and understanding of the structure of the insurance contracts within the organization. Once data is pulled, the approach- GMM, PAA and VFA is decided for treatment of each contract. Once all the contracts are categorized into different approaches then cohorts are formed within each category. Within each cohort, there should not be contracts which are not started within a year.

Within each cohort, contracts are further grouped into non-onerous, risky, and onerous categories. All the calculations including CSM, risk adjustments and fulfillment cash flow are done at this group level. A discount rate is also applied at this level. Fulfillment cash flows are calculated for each contract for the full coverage period. Fulfillment cash flows include CSM realized at each reporting date, and income statement calculations.

Both models excel based and IFRS 17 software based are built in parallel and numbers are compared for all parameters at each reporting date in both the versions of the models. This verification ensures that the right process is followed in both the versions.?An Excel based model is prepared by an accountant while the IFRS 17 software-based model is prepared by the actuary.?All the documents of each step of the process are done by a business analyst and project management is done by a project manager.

Advantages of the IFRS 17: IFRS 17 helps to compare insurance companies in terms of profitability, financial position of the companies on a common accounting standard.

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